Wednesday, January 20, 2016

That means it’s time for IBM to puke another
quarter and hold an incomprehensible—literally, incomprehensible—earnings call
during which it spins every data point in such a positive light that you’d
think they held the winning Powerball ticket, while strictly limiting analysts to
one question—no follow-ups, please—and abruptly cutting things off when the
hour is up.

For those of us accustomed to the full
disclosure practiced by the terrible, horrible, no-good banks, this practice of
IBM’s management team not belaboring bad news is something out of Fawlty Towers
(“Don’t mention The War.I mentioned it once but I think I got away
with it.”)

By way of comparison, Wells Fargo and Citi’s
back-to-back earnings calls last Friday started at 10 a.m. E.S.T. and ended at 1:15
p.m., give or take.

Analysts on both calls were free
to “get back in the queue,” as they say, and they did, until every question was
exhausted.

But that practice is not the IBM Way.No sir.

Windy analysts are quickly cut off and the
opportunity to follow-up an obfuscatory answer (the IBM norm) is not given—bringing to mind yet another Basil Fawlty line:
“Trespassers will be tied up with piano wire.”

So if you didn’t get a chance to listen to
IBM’s earnings call—and we’ve poked fun at them for years, most recently
here—you really ought to read the transcript courtesy of the indispensible
Seeking Alpha, here.

If you didn’t know any better, you’d think that
IBM is swimming in gold, that its cloud offerings are taking the world by storm
(“We’re the largest,” they declare, without mentioning that their internal measure includes
low-margin IBM hardware), and that Watson, which as they always remind us won
Jeopardy in 2011 (or was it 2010?Or was
it actually Wheel of Fortune during Kardashian Week?) is the next Amazon Web Services, which it is not.

In reality, IBM’s revenues are down—even in
the not-falling-apart Americas—its cash flows are down, its share repurchases
are down (even though the stock is down, and presumably more attractive than the last time they spent billions propping it up), and
the only reason it “beat the number” was, naturally, the tax rate, which IBM
plays like Duane Allman played “Whipping Post.”(See “Bring Out the Belgian Waffle!” here.)

Oh, and never forget that IBM always makes sure to exclude the negative impact of currency and divestitures on these calls and in their press releases, but does not exclude the positive impact of acquisitions. And IBM made seven cloud acquisitions alone in 2015.

Altogether, it is, as we started at the top, literally
incomprehensible.

And if you don’t
believe us, try this answer from the CFO on for size, about the miss in IBM’s
super-high-margin software business:

Sure thank you, thanks Toni. A few comments
on software, so as we said in our prepared remarks, the deceleration third to
fourth really was driven by this – by the mix shift and the continuation of the
transaction closing rates that we saw in September. So we talked about – coming
out of September we talked about a slower rate of closing in some of our larger
deals and that’s what we experienced as well in the fourth quarter. And as I
mentioned in my prepared remarks, because of the mix shift alone we see an
improvement and as you point out the weather company another acquisitions by
the way to the extent that they are – have software in them they will obviously
bolster that growth rate.

A few things, I think are important to note within
software. First, as we said in our prepared remarks and the phenomena is really
no different in the fourth and what we’ve seen all year, our annuity business
within the software business. So that’s about 70% of our overall software
stream. Our annuity business continues to grow. So that has a service in it, it
has our subscription and support business in it as well, so that continues to
grow.

And then outside of our largest clients and
this is a phenomena that we’ve been talking about, outside of our largest
clients where they don’t have as broad access to our software portfolio, we
continue to see growth as well, both transactionally and they’re obviously part
of the asset service stream. Within the large clients as I mentioned earlier
and as we talked about in our prepared remarks, we provide flexibility, it
gives them – it gives our clients an ability now to manage their projects and
they deploy maybe differently than they anticipated at the beginning of the
year. From my discussions with our clients, a lot of that depends on the
visibility they have both of their demand patterns and the visibility they have
to sort of the – kinds of projects they might have to implement in the
near-term.

So I don’t think that’s any different than
what we’ve experienced in the past…

If you can make anything of that—and we’re
pretty sure even Warren Buffett, the largest IBM shareholder, couldn’t make
anything of that—let us know.

Meantime, don’t
mention the revenue drop, the earnings decline or the cash flow
shortfall.I mentioned them once but I think I got away with it…

Jeff Matthews

Author
“Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

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